A turning point for rare earths?

By Myles McCormick, Cameron Perks
Published: Friday, 17 February 2017

Could a price increase by the world’s biggest rare earths producer herald brighter days ahead for an industry that has been struggling with low prices?

Between the close of business on Friday 10th and Wednesday 15th February, the share price of Lynas Corp., the only significant producer of rare earths outside of China, jumped 30%.

The spike in the company’s share price was reportedly a direct response to an announcement by China Northern Rare Earth Hi-Tech Co., the world’s largest rare earths producer, that it would hike its prices in a move some have speculated may represent a turning point for the struggling industry.

Rare earths prices have been weighted down for some time, with the industry saturated by volumes of material produced in China, much of it illegal.

But China Northern’s price increase coupled with the market’s vote of confidence in Lynas are indicators to some that this may soon change.

Lynas Share price
Lynas has seen its share price spike following a price increase by China Northern, the world's largest rare earths producer. (Image Source: ASX).

"My feeling is this is a turning point," Damien Krebs, metallurgy manager with Greenland Minerals and Energy Ltd, told IM.

"[China Northern] have said 'we’re not selling at these prices any more’ (...) and a lot of Chinese companies follow [their lead]," he added, noting that with an output of 50,000 tpa in a global market of roughly 135,000 tpa, any move China Northern makes is bound to have a significant impact on the market.

For now the focus of the increases has been on light rare earths, but heavy rare earths could follow suit, Krebs said.

With the Chinese economy stable and demand for magnets in technology rising, Krebs believes the rare earth market is well poised for a recovery.

He pointed to price increases in battery minerals such as lithium and cobalt as another argument in favour of a rare earths turnaround. "Look at rare earths and think. The arguments for [lithium and cobalt] are consistent with the arguments for rare earths," he said.

Respite for Lynas

A Lynas spokesperson told IM the company "welcomes any improvements in market economics".

She noted the increases in published prices for rare earth products within China of "up to 6%" but added that Lynas is yet to see the effect of these on its own rare earths prices.

"As indicated in previous advice to the market, given the achievements to date on production and costs, Lynas is heavily leveraged to any improvements in market price," she said.

"[The Lynas share price increase] is all to do with that price increase in NdPr [neodymium-praseodymium]," Rob Brierly, an analyst with Patersons Securities Ltd, told IM.

"Until now, low [rare earth oxide] prices have crimped share price performance and the announcement from China Northern is the first sign of meaningful price improvement for some time," he added.

The China question

With the market relying on China for around 95% of rare earths produced globally all eyes are on the Asian nation for future developments.

Any restriction on exports imposed by China could send prices soaring, for example. And it has been speculated that this is one weapon in the country’s arsenal should a trade war break out with the US under the Trump administration.

Were China to restrict rare earths exports to the US, it could wreak havoc. The US has no production of its own since the mothballing of Molycorp’s Mountain Pass facility in 2015, having been driven under by the low price dynamic.

There is precedent for such a move too. In 2010, China suspended rare earth exports to Japan amid a territorial dispute in the East China Sea.

But even without a trade war, with China's position as the world's largest supplier, any fluctuation in the country’s output can have strong effects on the industry.

The Chinese government has expended a lot of effort trying to clamp down on illegal rare earths mining within the country. Companies flouting strict government quotas has resulted in more material being dumped on an already saturated market.

Ongoing government inspections can now lead to production being cut off and quotas deducted if a company’s sales and output numbers do not correspond, or if a company exceeds its production quota. If a company is found to be illegally mining material, it can be added to a black list, affecting its ability to secure credit.

The clampdown has seen the Chinese media encouraged to expose any illegal activities, with individuals promised rewards if they expose illegal activity.

It is unclear how effective the government’s efforts will be. But if it can successfully regulate supply, it bodes well for prices generally.

Krebs describes the supply situation in China as "the random element" in the rare earths question.

"It really boils down to China (…) If supply [can be held] fixed and flat, and demand rises, price will have to go up," he said.

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